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Important Kentucky lender liability case reversed

On January 28, 2011, the Kentucky Court of Appeals issued an important decision reversing a much discussed lender liability jury verdict. In Branch Banking and Trust Company v. Larry E. Thompson, et al., Case No. 2009-CA-001427-MR, commercial borrowers alleged it had been fraudulently induced into entering into a loan transaction and that the bank had subsequently fraudulently induced the borrowers to sign a forbearance agreement containing, among other important clauses, a release of claims against the bank. A jury found in favor of the borrowers, and awarded $1,600,000 in actual damages and $9,000,000 in punitive damages. The trial court did award BB&T judgment for the unpaid balance of the loan and the Bank’s incurred attorney fees by way of offset. The Court, however, denied the Bank’s motion for Judgment Notwithstanding Verdict, which the bank claimed was justified on several ground including that the forbearance’s release clause barred the borrowers’ claim for alleged past misconduct and that Borrowers had failed to prove fraud in the inducement when they entered into that forbearance agreement. BB&T appealed the trial court’s decision and the borrowers appealed the portion of the judgment awarding the bank its attorney fees.

The Court of Appeals’ recently issued ruling reverses the trial court’s refusal to grant the bank its requested JNOV motion, but upholds the trial court’s award to the bank’s of its attorney fees. The Appellate Court found, as a matter of law, that the borrowers could not prove fraud surrounding the execution of the forbearance agreement, as the borrowers had not shown that they reasonably had relied on the alleged misrepresentations made by the bank. In essence the borrower argued that they should not be held to the terms of the Forbearance Agreement because its terms had been mischaracterized by a bank employee. The written terms of the forbearance agreement were at odds with the employee’s supposed characterization and thus the borrowers argued that the agreement was voidable.

Substance matters. Legal document drafting matters and the occasionally belittled “boilerplate” clauses have a real purpose for inclusion. The Court of Appeals pointed to at least four important provisions of the forbearance agreement:

A merger clause clearly stated that the forbearance agreement constituted the entire agreement of the parties and superseded all prior understandings.

A boldfaced provision stated that the bank was under no obligation to extend any future or additional forbearance to the borrowers.

A boldfaced (and all caps) provision stated that the borrowers released the bank from any claims that they could have asserted against the bank arising prior to the date of the forbearance agreement.

Another boldfaced provision stated that the borrowers acknowledged that they had read the forbearance agreement and had had the opportunity to review the same with their attorneys.

Form matters. The Court of Appeals focused upon whether the borrowers had shown through the evidence that they had reasonably relied upon the employee’s supposed misstatements. However, the bank was able to establish from its records that it had furnished to the borrowers a full copy of the forbearance agreement before its execution and that the borrowers purposefully failed to read the contents of the agreement. The express terms of the forbearance, of course, contradicted the alleged oral representations, a fact that would have become known upon the borrowers’ advance reading of the same, and the agreement contained an acceptable merger/integration clause.

The Thompson decision was rendered with instructions that it not be published. Until that designation is amended, the case has limited precedential value for future court cases. But there is reason to suspect that the import of Thompson will soon become well known to the portion of the bar who may wish to litigate against financial institutions. It is further worth noting that the borrowers have the right to petition to the Kentucky Supreme Court for discretionary review, if they so elect.

Notwithstanding these limitations, the Court of Appeals decision represents a reversal of what was a troubling lender liability case in Kentucky. The decision underscores the importance, and real-world value, of carefully crafted forbearance agreements in workouts of troubled loans between lenders and their borrowers. The decision sends the same message in fact to all businesses involved in resolving contractual disputes with their customers and suppliers. Legal document drafting matters, as does the process through which the parties ultimately reach their signed documents.

Compare jurisdictions:Arbitration

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